How Does a Lack of Finality Impact the Settlement Process for a Crypto Derivatives Contract?
A lack of absolute finality introduces settlement risk. If the underlying asset's transaction used for settlement is later reversed due to a chain reorg (malicious or otherwise), the entire derivatives contract settlement is compromised.
The exchange or clearinghouse would face uncertainty regarding the true price and ownership, potentially leading to disputes, financial losses, and a need to unwind or re-settle the contract, which is operationally complex and risky.
Glossar
Lack of Finality
Finality ⎊ Lack of Finality describes the state in a probabilistic consensus system where a confirmed transaction remains theoretically susceptible to being undone if a longer, competing chain of blocks is successfully mined.
Crypto Derivatives
Valuation ⎊ Crypto derivatives represent financial contracts whose value is derived from an underlying cryptocurrency asset, extending traditional derivative concepts to the digital asset space.
Settlement Process
Clearing ⎊ This phase involves the final confirmation and reconciliation of all trade details between the buyer and seller, often managed by a central counterparty or a decentralized protocol.